GDP surprises on the upside, labor productivity surges in 2020

ISRAEL - In Brief 21 Feb 2021 by Jonathan Katz

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GDP contracted by 2.4% in 2020 GDP per capita contracted by 4.1%, relatively modest in light of extended periods of closures. Israel enjoyed two drivers: Hi-tech service exports (software, etc.) expanded by 18% in 2020, and a strong net negative tourist account. Lack of flights abroad supported domestic consumption. Labor productivity in the business sector increased by 6.8%. Q420 GDP growth reached 6.3%, better than expectations. We maintain our GDP forecast of 4.2% in 2021. A weak Q121 will be a drag on annual growth. Inflation surprised on the upside in January as rental and durable prices moved higher. Core inflation reached zero y/y from -0.4% last month.· We expect inflation of 0.9% in 2021 on higher commodity prices, higher rental prices, the impact of pent-up demand, and a fairly stable shekel.Recent data has been weak: PMI down to 49.5, consumer confidence down (CBS, while the Poalim index was more optimistic), broad unemployment up and job vacancies low. Growth expected to rebound with the opening up of the economy.FX: The shekel weakened by 0.8% against the basket.This reverses the trend of the previous few weeks. Nevertheless, Israel’s strong vaccination story remains shekel positive.Monetary policy: Today the Bank of Israel will publish their rate decision: we expect rate stability at 0.1%, no change in the various intervention schemes (FX and FI) and no change in the forward guidance. The general tone of the announcement is expected to be more upbeat regarding the economy due to mass vaccination and opening of the economy. It will be interesting to note how the BoI reacts to January’s upward inflation surprise.Covid: The economy opens up this week: The nu...